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Altria Surprises With Its Latest Reduced-Risk Move

Find out how the tobacco giant's strategic direction differs from that of some of its peers.

Cigarette smoking has been on the decline for decades, and tobacco giant Altria Group (NYSE:MO) has had to balance its pricing power against adverse long-term volume trends to try to maximize profits even as revenue growth has been somewhat under pressure. In place of traditional cigarettes, consumers have increasingly moved toward alternatives like e-cigarettes and vaping products, and even the largest players in the tobacco space have made efforts to fill in their product lines with newer offerings designed to capitalize on that demand.

To allow for consideration of such strategic moves from the tobacco industry, the U.S. Food and Drug Administration began accepting applications to have modified risk tobacco products approved by the regulatory agency. Companies in the industry have responded by submitting applications for items like e-cigarettes and heated-tobacco products, hoping that their claims of more favorable health impacts will earn them approval. Yet late last month, Altria submitted an FDA application for a product that's been around for a long time: smokeless tobacco.

Image source: Altria.

What Altria did

On March 20, Altria said that its U.S. Smokeless Tobacco Company subsidiary had submitted a modified risk tobacco product application for its Copenhagen Snuff Fine Cut moist smokeless tobacco product. The product is U.S. Smokeless Tobacco's most popular line, with nearly a third of the nation's market share of smokeless tobacco.

The argument in favor of the application is simple: Altria maintains that experience with smokeless tobacco has demonstrated that the product is less risky than combustible cigarettes. As U.S. Smokeless Tobacco unit CEO Brian Quigley described in Altria's analyst day in November, analysis of studies using government data support the company's claim that smokeless tobacco use is 96% less risky from a mortality standpoint than cigarette smoking, and specific risks for respiratory disease, heart disease, lung cancer, and digestive cancers are significantly lower as well.

What many will find surprising is that Altria's scientific evidence shows that even for oral cancer, risks are lower for smokeless tobacco than for traditional cigarette smoking. That runs contrary to popular opinion, especially in light of high-profile sufferers of the disease calling out the product in the past. Yet with its argument that the numbers support the claims, Altria believes that it can successfully argue that Copenhagen deserves modified risk approval.

Getting past the spit

Smokeless tobacco is only a tiny part of Altria's overall business, and part of the problem is that many consumers aren't comfortable with the experience of using the product. Even Quigley admits that moist smokeless tobacco "only appeals to a subset of adult smokers, and for some, there is social friction." Copenhagen therefore will represent only a portion of Altria's overall reduced-risk strategy, with other products like the MarkTen e-cigarette also carrying their weight.

Even in oral tobacco products, Altria sees potential for products that get a more favorable reception from many consumers who don't like snuff. The Verve line of discs, chews, chewables, and melts offer blue and green mint flavors, and early results in lead markets in Virginia have been encouraging. U.S. Smokeless Tobacco expects to file an FDA application for Verve as well this year, and over the long run, a larger portfolio of products taken orally could make it clear how Altria expects to make a transition from traditional cigarettes.

Will Altria win?

The challenge that Altria faces is that the regulatory environment for tobacco products generally isn't all that good right now. The FDA has been vocal about its efforts to rein in nicotine-containing products more broadly, with recent efforts to require the production of low-nicotine alternatives to traditional tobacco products. It could be difficult for the FDA to approve an existing product without a demonstration of reduced nicotine exposure, and that doesn't seem to be the approach that Altria is making.

Moreover, even Altria's own explanations admit that smokeless tobacco isn't a perfect answer. As CEO Marty Barrington said, "It is now accepted by most public health researchers that smokeless tobacco, while not safe, is a far less-risky way to use nicotine than cigarette smoking." It's unclear whether the FDA will respond well to claims of relative safety, even though the entire idea of "modified risk" assumes that some risk could remain.

Altria's move to have Copenhagen approved as a reduced-risk product will surprise some investors, but it's part of the tobacco giant's long-term strategy to address falling demand for regular cigarettes. As the application plays out at the FDA, it'll be interesting to see how Altria fares with this and other products that it expects to submit for regulatory consideration.

Author

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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